Future of Finance

With Mitt Romney, the former head of Bain Capital, running for president in the U.S. elections, the private equity industry is in the spotlight. And most firms are not enjoying the attention. They’re accused of buying businesses, leveraging them up, cutting costs and outsourcing staff. And while they’re ripping apart these companies, they are delivering double-digit returns to their investors.

Jane Rowe, head of Teachers’ Private Capital, the $12.2 billion private equity arm of the Ontario Teachers’ Pension Plan, doesn’t have a problem with buyouts generating great returns. Rowe’s only investors are 300,000 teachers, and private equity has been a significant contributor to their pensions. Rowe isn’t shy about emphasizing the 19.3 percent return her group has returned since its inception in 1991. “That’s over 20 years,” she says. “20 years,” she repeats, putting the fund, if it were independent, in the top quartile of private equity firms.

Ontario Teachers’ has become synonymous with the Canadian model of pension investing. Rather than hire money managers in such areas as real estate, infrastructure, private equity and publicly traded equities, Ontario Teachers’ has brought investing professionals on staff and gives them the authority to make deals without using intermediaries. Private equity has been a big driver of the model’s success. At the same time, Ontario Teachers’ uses funds in some areas where it feels it’s more costly to do it itself.

Rowe joined the pension plan two years ago, after a 23-year career at Scotiabank Group. She succeeded Erol Uzumeri, who left Ontario Teachers’ to launch his own private equity firm. Most recently, Rowe was responsible for the strategic global management of workouts and retail credit risks across Scotiabank. She had also held such roles as president and CEO of RoyNat Capital, Scotiabank’s midmarket merchant bank.

Rowe came to Ontario Teachers’ after thinking about how she wanted to spend the last 10 years of her career; she’s 55 now. “The regulatory environment is becoming more intrusive and here was an opportunity to work in a less cumbersome environment at the pension plan,” says Rowe. She also believes that Ontario Teachers’ has a huge opportunity in private equity now that banks are being forced to shed these assets.

About half of Ontario Teachers’ Private Capital assets are allocated about evenly between private equity funds investing in emerging markets, North America and Europe. The other half is invested directly in portfolio companies and alongside private equity firms in what are called co-investments. The funds that Teachers’ chooses are watched closely by other investors. “We work with funds that we hope will think of us as a co-underwriter,” she says. “They’re an extension of us. So they have to be very good.” Among Ontario Teachers’ portfolio companies are GNC, Serta and Simmons. Fund partners include Ares, SilverLake and Apollo. TPC has 70 direct investments, 48 co-investments and 44 mezzanine investments.

Ontario Teachers’ differs from other buyout groups in that it has a permanent capital base so it doesn’t have to raise funds or plan an exit strategy from the start. “We don’t take a three- to five-year view on something. We buy it because we think it’s a great company to own,” she says. 

Rowe wants Teachers’ Private Capital to expand further into Europe, even amid the continent’s debt struggles. “The displacement of capital markets in Europe will create interesting investment opportunities for us,” she says. In July Ontario Teachers’ said it would acquire a majority of Helly Hensen, a Norwegian designer of outdoor clothing. Jo Taylor, who joined Ontario Teachers’ earlier this year to head the London office and oversee private equity investing in Europe, the Middle East and Africa, says the private capital group is targeting iconic brands that have room for expansion. “Helly Hensen is a 130-year-old company with great financial performance in key geographies. But they are absent in others,” says Taylor.

The pension plan also made a £73 million ($116 million) offer to acquire Goals Soccer Centres in the U.K. Taylor says the five-a-side soccer company was an attractive business to expand outside the U.K. But the offer didn’t go according to plan. Shareholders rejected the pension plan’s bid in August because they found it too low, even after the board approved it.

Taylor says he is looking at investments in the U.K., the Benelux countries, Germany and Scandinavia. “The beer drinking countries as opposed to the wine tasting countries,” he quips. But what is more important is that he wants companies with good management teams that can grow in the current environment.

Teachers’ Private Capital also wants a bigger footprint in the emerging markets, even though it invested in a developing-world fund back in 1994. Additional investments in Southeast Asia and India are of particular interest.